ATLANTA, GA (Dec. 20, 1999) -- Recently, I've taken a side trip from writing about Pathfinder companies and begun a series looking at Home Depot(NYSE: HD) and Lowe's (NYSE: LOW). I know I promised to look at Lowe's this week, but a couple of things occurred that have me staying with Home Depot for another column. First, let's look at the latest news.

Home Depot announced that it plans to acquire Apex Supply Company, which is a privately held distributor of plumbing and HVAC (heating, ventilation, and air conditioning) supplies. Apex has 21 locations, and supplies the professional trades. The other interesting tidbit is that Home Depot has now surpassed Coca-Cola(NYSE: KO) as Georgia's largest company as represented by market value.
In addition to the latest news, I had a discussion with James Grant from investor relations at Home Depot, and I'd like to give a short synopsis of what I discovered. First off, I mentioned to him that I received five e-mails from people that had received poor service at various stores. He said they have 900 million transactions a year in their stores, so even if only one percent go bad, that's 9 million. In order to combat this, they have a strong customer support infrastructure, which you can e-mail through their website at www.homedepot.com. I had an incident with a rude employee, and made a complaint through the website. I received an immediate response from the store manager, so I can attest to how attentive they are.

Mr. Grant and I discussed the Apex acquisition and its impact. Mr. Grant said this would open up more of the contractors' market and create opportunities with property management firms. I was curious if Home Depot would expand to supply to the larger home builders, and at this point the answer is "No." To do so would require extensive warehousing space, which Home Depot is not geared up to offer.

I asked him about the competition. Who is their strongest competitor? I figured it was Lowe's. Mr. Grant surprised me when he said that the strongest competitors are the ones that do business in a certain category, such as Sears for tools, floor-covering stores, and "Joe's Lumber." He also said that in addition to Lowe's, there is Manard's out in the Midwest (privately held). Manard's has about 180 stores, according to Mr. Grant.

How much expansion is left? Mr. Grant says they "cannot fill large markets fast enough." They are also expanding sales in existing stores by branching out into appliances, plumbing and HVAC, hardware, and tool rental. This brought on the next question -- what about expansion overseas? Home Depot has some presence outside of the country with four stores planned in Argentina and "four or five" already in Chile. Also, there is a large presence in Canada with 51 stores. As for further expansion outside of the country, "there is none announced." However, they recently hired Anders Moberg, who was the CEO of IKEA Group and "President of International Operations." Perhaps we can draw our own conclusions from that.

We had an interesting discussion about Home Depot's direct investing program. Many of you probably know that you can sign up for their plan directly through Stockpower (www.stockpower.com) without sending a bit of paperwork. I mentioned to Mr. Grant that a fair number of our Fools felt that Home Depot's direct investing plan should be avoided because it charges fees. His response was certainly thought provoking. First, he pointed out that "there are many types of investors," from ones that go to full-service brokers, those that choose discount brokers, others who prefer Drips -- plus, there are mutual funds and institutions. All of the purchases of the stock have associated costs. "Why should one class of investor subsidize another class of investor?" he asked. Home Depot doesn't want to increase "G&A expenses... to subsidize [only certain] shareholders."

One of the issues that concerns me about any retailer is what should have concerned anyone that invested in Zayre's, E.J. Korvette's, or Hechinger's. All of those companies are out of business. Did you know that Hechinger's sent a bouquet of black roses to Home Depot when they opened their first store in the Washington, D.C. area? How is Home Depot going to avoid going the way of Lost Retailers? Mr. Grant says the company is "proactive" and reacts to the changing market. That was fine, but he said that they were always coming up with new ways to do things, such as their planned entry into e-commerce. This took me by surprise.

How in the world do you sell two-by-fours over the Net? I imagined the UPS guy coming up my driveway with a bundle of them wrapped in brown paper. No, that's not the way it will go. Mr. Grant said the orders would in most cases go to the local store, which would either deliver the items, or package them for the customer to pick up. Working like I do in the building business, my thought was how convenient this would be for a contractor. He or she could prepare an order in the evening at home and arrange for it to be shipped right to the job site. No time wasted on the phone, there would be fewer chances for error, and the cost would be tabulated right there as the order was taken. Many contractors try to avoid going in person to the building supply store, but phone orders often have errors in them. Of course, home owners could do the same, and everything could be delivered in time to your house for that Saturday project.

Mr. Grant said the website would be built "for customer service and fast response," and it "will have customer response beyond what it needs." Unlike many e-commerce sites, he said, "This one will actually make money."

Next week, I'm going to get back on schedule and we'll go wandering the aisles of Lowe's. I'll try to contact the company's investors relations department, and we'll compare their finances with Home Depot's. Please continue to send me your impressions of these companies, or post them in the Drip Companies message board linked below. I also would like wish all of you the best for this season, and let you know that I am the luckiest writer in the world to be blessed with Fools like you. I enjoy reading your e-mails, and the discussions with all of you. Have a wonderful holiday.

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